Obama Manufactures a Gift to the World

Having apparently learned nothing about how global commerce operates after three years in office, President Obama has offered a plan to revive manufacturing that should work like a charm – everywhere except in America, that is.

Maybe the president really believes that a manufacturing job is worth more than a job at equal pay doing something else. Maybe he merely believes it is important to promote manufacturing because factory jobs are important in certain Rust Belt states that are vital to his re-election prospects.

As I’ve written here before, Obama’s approach to generating jobs in the U.S. is largely based on penalizing American companies that invest overseas. The corporate tax plan Obama rolled out last week delivered on his previous pledge to try to grab a bigger share of companies’ foreign profits. “From now on, every multinational company should have to pay a basic minimum tax,” Obama told Milwaukee factory workers this month. “And every penny should go towards lowering taxes for companies that choose to stay and hire in the United States of America.”

Let’s consider how this might work in practice. Ford and Toyota both sell cars in Brazil. Both have manufacturing plants there and elsewhere in Latin America, and both raise money from investors all over the world. Both also happen to make and sell cars in the United States, of course. But Ford is an American company, based in Michigan, while Toyota’s top bosses reside in Japan.

Obama says he would force Ford to pay a yet-unspecified “minimum tax” on its income in Brazil, even if that money is not brought back to the United States. Toyota faces no such burden, either in Japan or here. If you are investor in, say, Switzerland, why would you buy shares in a company that must pay U.S. taxes on profits it makes outside the United States, when you could avoid that burden by owning shares in Toyota, or another non-U.S. company, instead? Why would you want to lend money to Ford by buying corporate bonds or commercial paper that it might issue, when some of that money is going to be drained from Ford’s profit-seeking activities for the purpose, irrelevant to you, of promoting some other company’s American manufacturing?

Manufacturing is a capital-intensive exercise. Obama’s proposal will put American companies at a disadvantage in raising capital, merely because those companies are organized and managed here.

But that may not be all that is wrong with Obama’s idea. He has not yet told us whether his “minimum tax” would be in addition to the taxes imposed by the local government (Brazil, in our example), or whether the U.S. would offer a credit against American taxes to offset the Brazilian tax. Without a full credit, Obama would increase the total tax burden on U.S.-based companies while foreign competitors remain unaffected. With a credit, however, Obama’s plan won’t generate any revenue for the U.S. Treasury. Countries like Brazil might even increase their own corporate income taxes if they know that the firms that pay those taxes will receive an offsetting credit in the United States. It’s free money for foreign governments, at the expense of the U.S. Brazil might even raise its income tax in sectors where American firms make a lot of money, knowing that any increase in taxes paid to Brazil would be offset by credits back home.

The United States is almost alone in the developed world in its insistence on taxing expatriate citizens and non-citizen residents on their global income, as opposed to taxing only the income earned inside or while residing in the U.S. Applying this dubious but deeply ingrained policy to corporations, as the president seeks to do, makes no economic sense. Corporations don’t really “live” anywhere. We have already seen Chrysler go from being an American company to a subsidiary of a German company, and back to American (and government-supported) status, just in the past several decades. Punishing American multinationals simply for being American will accomplish nothing except to weaken them in global competition and to turn many of them into takeover bait.

American labor is not cheap, but it is productive. According to United Nations data analyzed by The Los Angeles Times, the value of goods made in the United States has more than doubled since 1979, while the number of people employed to produce those goods has decreased 40 percent. What we’re seeing is a domestication of American manufacturing. We still produce a significant share of the products that are sold in this country, but manufactured exports, except for big-ticket items like aircraft and construction equipment, are losing global sales to foreign competitors.

We cannot reverse this trend by seeking to impose American taxes on corporate profits generated elsewhere. Instead, we ought to reduce corporate taxes or eliminate such taxes altogether, taxing corporate profits only when they are paid as dividends or interest to U.S. taxpayers. This would encourage domestic and foreign corporations to put their factories here, not just to serve the U.S. market, but also to produce products for export.

If those factories don’t pay U.S. income taxes, we should not care. They will pay plenty of other taxes, including Social Security taxes for the workers they will hire, and the workers themselves will pay taxes and require less in the way of government benefits and services.

Companies do their business at whatever location makes the most sense. They don’t send jobs overseas because they have something against doing work here. In fact, many firms find that global manufacturing comes with some very high costs of its own, which are only worthwhile because American costs are even higher.

Jerry Rosenstein, the owner of a small manufacturing company in Santa Monica, Calif., that outsources much of its production, recently told The Los Angeles Times that the costs of outsourcing have been higher than he expected. “I go to China often,” he said. “I send our product manager, our manufacturing engineer over, just to make sure everybody’s together. You cannot imagine the overhead in support time.”

Doing business in China comes with its own particular headaches. Protecting trade secrets is a serious difficulty, due to both legal technology sharing mandates and cyberspying. “If a company has significant intellectual property that the Chinese and Russians are interested in, and you go over there with mobile devices, your devices will get penetrated,” Joel F. Brenner, formerly the top counterintelligence official in the office of the director of national intelligence, told The New York Times. Jacob Olcott, a cybersecurity expert at Good Harbor Consulting, echoed the warning, saying that executives travelling in and out of China should simply assume that any devices they bring with them will be hacked. That doesn’t exactly make for a congenial business environment.

America has all sorts of competitive advantages, including flexible labor markets, good infrastructure, skilled management, a fair legal system and, up to this point, the deepest and most resilient capital markets in the world. With supportive government policies, companies from all over the world could continue to operate profitably here. Profitable operations and sustainable jobs go hand in hand.

But we can’t create “an economy that’s built to last,” as the president called for in his State of the Union speech, by punishing American companies for operating around the world. That’s the kind of campaign rhetoric one might expect from a law instructor and community activist who has never understood the private sector. It’s not what we should expect from a president who has been on the job for three years and counting.

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